Poor returns and a tax bill_140308.pdf (PDF - 53KB)

Melbourne, 14 March, 2008 - Vanguard Investments Australia (Vanguard) has released its latest after tax returns analysis which suggests some investors may cop a double whammy at the end of the tax year - capital losses topped by a tax bill.

Based on Morningstar return data, Vanguard compared the average income and growth returns for the top 20 Australian equity wholesale funds by size and the total market for the year ended 31 December 2007.

While the top 20 Australian equity funds delivered a sound 13.7 per cent headline return for the 2007 calendar year, the growth and income components tell a different story - with -3.9 per cent delivered in growth and 17.6 per cent in income. This compares to the total market, which delivered almost no growth while income levels effectively matched the total return.

The Vanguard® Australian Shares Index Fund reversed this trend, delivering two-thirds of its return in growth and one-third in income.

In fact, as shown in table 1, Vanguard's Australian Shares Index Fund delivered a higher absolute return of 15.9 per cent, including 5.3 per cent as income and 10.6 per cent as capital growth*.

Michael Houlihan, Vanguard's Manager of Retail Products and Technical Services said, "When you look at the Morningstar performance data for 2007, some major funds are on track to hit investors with a double whammy - capital losses and a hefty tax bill.

During periods of market volatility investors tend to concentrate on their absolute returns. But when the volatility settles, the after-tax impact of their investment becomes the most important number for investors."

The portfolio turnover of a fund provides a good indication of its tax efficiency. If a security is held for longer than 12 months, the capital gains on the disposal of these securities is charged at a lower tax rate. In its last review of Australian equity funds, Morningstar found that the median expected turnover was 50 per cent per year with actual turnover levels ranging between five and 150 per cent.

The fundamental 'buy-and-hold' approach means index managers generally turn their portfolios over less often than active fund managers, resulting in lower trading costs. However as the Morningstar data shows in table 2, not all index managers are the same.

Vanguard uses an optimised approach to indexing rather than full replication. Full benchmark replication usually results in higher turnover of the portfolio with typical benchmark turnover of around five to 10 per cent. This compares to Vanguard's average turnover of around two to five per cent.

The returns to 31 December 2007 serve as a strong reminder to investors to delve deeper into the composition of their fund returns.

"Investors and their advisers must focus on the after-tax result, especially during these times of sharemarket volatility," Mr Houlihan said.

* Past performance is not a reliable indicator of future performance.

Table 1. Top 20 fund managers income/growth Australian equity returns
For the period ended 31 December 2007

Source: Vanguard using Morningstar subscription data. Past performance is not a reliable indicator of future performance. #1 Universe: 188 large cap blend, growth, value, open wholesale investment trusts. Returns are shown net of fees.

Table 2. Index income/growth returns for the year ended 31 December 2007

Source: Vanguard using Morningstar subscription data. Past performance is not a reliable indicator of future performance. Returns are shown net of fees.